Chapter 12

Insurance Contracts

PROBLEM 12-1: TRUE OR FALSE

1. FALSE 6. TRUE
2. FALSE 7. FALSE
3. TRUE 8. FALSE
4. FALSE 9. TRUE
5. FALSE 10. TRUE

PROBLEM 12-2: THEORY & COMPUTATIONAL

1. D

2. C

3. B

4. D

5. A

6. D

7. C

8. C

9. A

10. B

11. B

12. A

13. Solution:
Jan. 1, Insurance receivable – direct 22,500
20x1 Commission expense 2,500
Gross premiums revenue – 25,000
direct

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14. Solution:
Jan. 1, Insurance receivable – assumed 9,000
20x1 Commission expense 1,000
Gross premiums revenue – 10,000
assumed

15. Solutions:
Requirement (a): Earned portions – 1st quarter
Jan. 31 Feb. 28 Mar. 31
Gross premium 120,000 120,000 120,000
Multiplied by: 1/24 2/24 2/24
Earned portions 5,000 10,000 10,000

Requirement (b): Unearned portions – 1st quarter

Jan. 31 Feb. 28 Mar. 31
Gross premium 120,000 120,000 120,000
Multiplied by: 23/24 21/24 19/24
Unearned portions 115,000 105,000 95,000

The numerators in the fractions are determined as follows:

 Jan. 31: (24 – 1 earned in Jan.) = 23 unearned portion
 Feb. 28: (24 – 1 earned in Jan. – 2 earned in Feb.) = 21 unearned portion
 Mar. 31: (24 – 1 – 2 – 2) = 19 unearned portion

Requirement (c): Earned portion – Dec. 31, 20x1

Gross premium 120,000
Multiplied by: 23/24
Earned portion - Dec. 31, 20x1 115,000

Requirement (d): Unearned portion – Dec. 31, 20x1

Gross premium 120,000
Multiplied by: 1/24
Unearned portion - Dec. 31, 20x1 5,000

Requirement (e): Journal entries

The entry on January 1, 20x1 is as follows:
Jan. 1, Insurance receivable – direct 120,000
20x1 Gross premiums revenue –
direct 120,000

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The adjusting entry on December 31, 20x1 is as follows:
Dec. Change in provision for unearned 5,000
31, premiums
20x1 Provision for unearned 5,000
premiums

The “Change in provision for unearned premiums” is recognized in

profit or loss as an adjustment to “Gross premiums” to compute for
the earned portion.

The “Provision for unearned premiums” is presented in the statement

of financial position as part of “Insurance contract liabilities.”

The method of recording used in the entries above is the “income

method,” as opposed to the “liability method.”

16. Solutions:
Requirement (a): Earned portion – Dec. 31, 20x1
Gross premium 120,000
Multiplied by: 15/24
Earned portion - Dec. 31, 20x1 75,000

“15” in the “15/24” fraction means 15 periods equal to 1 period (one-

half) in May and 2 periods (2 halves) in each of the months of June to
December.

Requirement (b): Unearned portion – Dec. 31, 20x1

Gross premium 120,000
Multiplied by: 9/24
Unearned portion - Dec. 31, 20x1 45,000

“9” in the “9/24” may be computed simply by deducting “15” (the

expired period) from “24” (the total period).

17. Solutions:
Requirement (a):
Sales in November and December (20,000 x 2) = 40,000

Requirement (b):
Sales in January to June (10,000 x 6) 60,000 + Sales in July to October
(20,000 x 4) 80,000 = 140,000

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18. Solutions:
Requirement (a): Acquisition costs recognized in profit or loss
Total deferred acquisition costs 120,000
Multiplied by: * 11/24
Expired portion 55,000

* (1 in July) + (2 each in August to December) = 1 + (2 x 5) = 11

Requirement (b): Deferred acquisition costs – Dec. 31, 20x1

Total deferred acquisition costs 120,000
Multiplied by: ** 13/24
Unexpired portion 65,000

** (24 -11) = 13

Requirement (c): Adjusting entry

Dec. 31, Deferred acquisition costs 65,000
20x1 Commission expense 65,000

19. Solutions:
Requirement (a):
Insurance contracts liabilities - carrying amount 4,100,000
Deferred acquisition costs (700,000)
Net amount 3,400,000
Insurance contracts liabilities - current estimate 3,500,000
Deficiency in insurance contracts liabilities (100,000)

Requirement (b):
The journal entry is as follows:
Dec. 31, Gross benefits and claims 100,000
20x1 Provision for premium
deficiency 100,000

PROBLEM 12-3: EXERCISES

1. Solution:
Jan. 1, Insurance receivable – direct 45,000
20x1 Commission expense 5,000
Gross premiums revenue – 50,000
direct

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2. Solution:
Jan. 1, Insurance receivable – assumed 18,000
20x1 Commission expense 2,000
Gross premiums revenue – 20,000
assumed

3. Solutions:
Requirement (a): Earned portions – 1st quarter
Jan. 31 Feb. 28 Mar. 31
Gross premium 240,000 240,000 240,000
Multiplied by: 1/24 2/24 2/24
Earned portions 10,000 20,000 20,000

Requirement (b): Unearned portions – 1st quarter

Jan. 31 Feb. 28 Mar. 31
Gross premium 240,000 240,000 240,000
Multiplied by: 23/24 21/24 19/24
Unearned portions 230,000 210,000 190,000

Requirement (c): Earned portion – Dec. 31, 20x1

Gross premium 240,000
Multiplied by: 23/24
Earned portion - Dec. 31, 20x1 230,000

Requirement (d): Unearned portion – Dec. 31, 20x1

Gross premium 240,000
Multiplied by: 1/24
Unearned portion - Dec. 31, 20x1 10,000

Requirement (e): Journal entries

The entry on January 1, 20x1 is as follows:
Jan. 1, Insurance receivable – direct 240,000
20x1 Gross premiums revenue –
direct 240,000

The adjusting entry on December 31, 20x1 is as follows:

Dec. Change in provision for unearned 10,000
31, premiums
20x1 Provision for unearned 10,000
premiums

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The “Change in provision for unearned premiums” is recognized in
profit or loss as an adjustment to “Gross premiums” to compute for
the earned portion.

The “Provision for unearned premiums” is presented in the statement

of financial position as part of “Insurance contract liabilities.”

The method of recording used in the entries above is the “income

method,” as opposed to the “liability method.”

4. Solutions:
Requirement (a): Earned portions
June 30 July 31 Aug. 31
Gross premium 240,000 240,000 240,000
Multiplied by: 1/24 2/24 2/24
Earned portions 10,000 20,000 20,000

Requirement (b): Unearned portions – 1st quarter

June 30 July 31 Aug. 31
Gross premium 240,000 240,000 240,000
Multiplied by: 23/24 21/24 19/24
Unearned portions 230,000 210,000 190,000

Requirement (c): Earned portion – Dec. 31, 20x1

Gross premium 240,000
Multiplied by: (a) 13/24
Earned portion - Dec. 31, 20x1 130,000

(a)
(1 in June) + (2 in each of July to Dec.) = 1 + 12 = 13

Requirement (d): Unearned portion – Dec. 31, 20x1

Gross premium 240,000
Multiplied by: (b) 11/24
Unearned portion - Dec. 31, 20x1 110,000

(b)
24 – 13 = 11

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Requirement (e): Journal entries
The entry on January 1, 20x1 is as follows:
Jan. 1, Insurance receivable – direct 240,000
20x1 Gross premiums revenue –
direct 240,000

The adjusting entry on December 31, 20x1 is as follows:

Dec. Change in provision for unearned 110,000
31, premiums
20x1 Provision for unearned 110,000
premiums

5. Solutions:
Requirement (a): Earned portion – Dec. 31, 20x1
Gross premium 240,000
Multiplied by: 7/24
Earned portion - Dec. 31, 20x1 70,000

“7” in the “7/24” fraction means 7 periods equal to 1 period (one-half)

in September and 2 periods (2 halves) in each of the months of
October to December.

Requirement (b): Unearned portion – Dec. 31, 20x1

Gross premium 240,000
Multiplied by: 17/24
Unearned portion - Dec. 31, 20x1 170,000

“17” in the “17/24” may be computed simply by deducting “7” (the

expired period) from “24” (the total period).

6. Solutions:
Requirement (a):
Sales in November and December of 20x1 (40,000 x 2) = 80,000

Requirement (b):
Sales in November and December of last year (20,000 + 25,000) 45,000 +
Sales in January to April, 20x1 (30,000 x 4) 120,000 + Sales in May to
October (40,000 x 6) 240,000 = 405,000

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7. Solutions:
Requirement (a): Acquisition costs recognized in profit or loss
Total deferred acquisition costs 120,000
Multiplied by: * 5/24
Expired portion 25,000

* (1 in October) + (2 each in Nov. & Dec.) = 1 + (2 x 2) = 5

Requirement (b): Deferred acquisition costs – Dec. 31, 20x1

Total deferred acquisition costs 120,000
Multiplied by: ** 19/24
Unexpired portion 95,000

** (24 -5) = 19

Requirement (c): Adjusting entry

Dec. 31, Deferred acquisition costs 95,000
20x1 Commission expense 95,000

8. Solutions:
Requirement (a):
Insurance contracts liabilities - carrying amount 2,300,000
Deferred acquisition costs (700,000)
Net amount 1,600,000
Insurance contracts liabilities - current estimate 1,800,000
Deficiency in insurance contracts liabilities (200,000)

Requirement (b):
The journal entry is as follows:
Dec. 31, Gross benefits and claims 200,000
20x1 Provision for premium
deficiency 200,000

9. Solution:
Feb. Cash 2,,800,000
1,
Gross premiums revenue – direct 2,,800,000
20x1
Feb. Cash 200,000
1,
Gross premiums revenue – direct 200,000
20x1
Mar. Insurance receivable 200,000
1,
Gross premiums revenue – direct 200,000
20x1
Mar. Cash 200,000
9,
20x1
Insurance receivable 200,000

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PROBLEM 10-4: CLASSROOM ACTIVITY

1. Solutions:

Requirement (a): Earned portions – 1st quarter

Jan. 31 Feb. 28 Mar. 31
Gross premium 420,000 420,000 420,000
Multiplied by: 1/24 2/24 2/24
Earned portions 17,500 35,000 35,000

Requirement (b): Unearned portions – 1st quarter

Jan. 31 Feb. 28 Mar. 31
Gross premium 420,000 420,000 420,000
Multiplied by: 23/24 21/24 19/24
Unearned portions 402,500 367,500 332,500

The numerators in the fractions are determined as follows:

 Jan. 31: (24 – 1 earned in Jan.) = 23 unearned portion
 Feb. 28: (24 – 1 earned in Jan. – 2 earned in Feb.) = 21 unearned portion
 Mar. 31: (24 – 1 – 2 – 2) = 19 unearned portion

Requirement (c): Earned portion – Dec. 31, 20x1

Gross premium 420,000
Multiplied by: 23/24
Earned portion - Dec. 31, 20x1 402,500

Requirement (d): Unearned portion – Dec. 31, 20x1

Gross premium 420,000
Multiplied by: 1/24
Unearned portion - Dec. 31, 20x1 17,500

Requirement (e): Journal entries

The entry on January 1, 20x1 is as follows:
Jan. 1, Insurance receivable – direct 420,000
20x1 Gross premiums revenue –
direct 420,000

The adjusting entry on December 31, 20x1 is as follows:

Dec. Change in provision for unearned 17,500
31, premiums
20x1 Provision for unearned 17,500
premiums

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The “Change in provision for unearned premiums” is recognized in
profit or loss as an adjustment to “Gross premiums” to compute for
the earned portion.

The “Provision for unearned premiums” is presented in the statement

of financial position as part of “Insurance contract liabilities.”

The method of recording used in the entries above is the “income

method,” as opposed to the “liability method.”

2. Solutions:
Requirement (a):
Sales in November and December (90,000 x 2) = 180,000

Requirement (b):
Sales in January to June (45,000 x 6) 270,000 + Sales in July to October
(90,000 x 4) 360,000 = 630,000

3. Solutions:
Requirement (a):
Insurance contracts liabilities - carrying amount 1,500,000
Deferred acquisition costs (800,000)
Net amount 700,000
Insurance contracts liabilities - current estimate 600,000
Deficiency in insurance contracts liabilities ( - )

Requirement (b):
The journal entry is as follows:
Dec. 31, No entry
20x1

PROBLEM 12-5: THEORY

1. D 6. D 11. D 16. D
2. B 7. A 12. C 17. D
3. A 8. B 13. B 18. C
4. C 9. A 14. A 19. A
5. B 10. B 15. A 20. B

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